How To Analyse/Evaluate India's Budget

HOW TO ANALYSE/EVALUATE INDIA'S BUDGET

(A framework to analyse/evaluate the Budget)

A. The Budget has 2 flows of money:

1. Inflow (Income) is called 'Receipts'.

2. Outflow (Spending) is called 'Expenditure'.

B. The Budget has 2 types of accounts:

1. Short-term transactions (that do not create assets/liabilities) go into the 'Revenue Account'.

2. Long-term transactions (that create assets/liabilities) go into the 'Capital Account'.

Thus we have:

2 Flows X 2 Accounts = 4 Components

These 4 components are:

1. Revenue Receipts: This is mainly taxes. This does not create any liability for the government. So this is good income.

2. Capital Receipts: This is mainly loans (a liability). Government has to repay this – with interest. So this is bad income.

3. Revenue Expenditure: This consists of salaries, pensions, schemes, subsidies and interest payments. This does not make the economy more productive – so this is bad spending.

4. Capital Expenditure: This is mainly infrastructure (an asset). This makes the economy more productive – so this is good spending.

Thus we have 2 'good' components:

1. Revenue Receipts (good income)

2. Capital Expenditure (good spending)

And 2 'bad' components:

1. Capital Receipts (bad income)

2. Revenue Expenditure (bad spending)

The 4 components must be seen relative to the GDP. So ideally, compared to last year:

1. The 'good' components must increase relative to the GDP.

2. The 'bad' components must decrease relative to the GDP.

That is, ideally:

1. The increase in the 'good' components from last year must be greater than the GDP growth rate (the greater the increase, the better).

2. The increase in the 'bad' components from last year must be less than the GDP growth rate (the lesser the increase, the better).

Finally, the most important number in the Budget is the Fiscal Deficit:

Fiscal Deficit = Spending – Income (excluding loans)

It is expressed as a % of GDP. It must be as low as possible. So the Fiscal Deficit must decrease as much as possible. The greater the decrease, the better.

Thus by:

1. Looking at the Fiscal Deficit

2. Comparing the increase in the four components with the GDP growth rate

We can say how good or bad a Budget is . . .

Caveat: Revenue Receipts must increase by increasing the tax base – not by increasing the tax rates.